prudential framework

The European Commission has recognised that a prudential framework designed for banks should be simplified for non-banks and has therefore published legislative proposals that aim to introduce more proportionate and risk-sensitive rules for investment firms. Under these proposals, the vast majority of investment firms in the EU would no longer be subject to rules that were originally designed for banks. At the same time, the largest and most systemic investment firms would be subject to the same regime as European banks.

The proposed prudential framework is based on a firm’s actual activities, its market presence and risk profile, and to achieve this, a proportionate approach is proposed.

The proposal includes:

  • new and simpler prudential rules for the large majority of investment firms which are not systemic, without compromising financial stability; and
  • amended rules to ensure that large, systemic investment firms which carry out bank-like activities and pose similar risks as banks are regulated and supervised like banks. This will ensure level playing field between the large and systemic financial institutions.

Firms are divided into three classes.

  • Class 1  Those systemic investment firms which carry out certain bank-like activities (i.e. underwriting and dealing on own account) and have assets over €30 billion. These systemic firms will be regulated as banks and remain subject to the Capital Requirements Regulation (CRR).
  • Class 2 – For larger non-systemic firms, capital requirements will be the higher of a permanent minimum capital level, ¼ of fixed overheads or the sum of a set of risk factors (K-factors). For firms which trade financial instruments, these will be combined with a simplified version of existing rules. The K-factors cover AUM, client orders handled (COH), client money held (CMH), assets safeguarded and administered (ASA), daily trading flows (DTF), net position risk (NPR), trading counterparty default (TCD) and concentration risk (CON).
  • Class 3 – The capital requirements for the smallest and least risky investment firms will be set in a simpler way. Minimum capital will be set as the higher of permanent minimum capital or ¼ of fixed overheads. These firms would not be subject to any additional requirements on corporate governance or remuneration.

Current status

The ECON committee of the European Parliament adopted the Commission proposals albeit with some amendments in late 2018. The European Council has now published its compromise proposal and entered into negotiations with ECON.

Some of the changes proposed by the European Council are:

  • Revised definitions of K-factors such as removing one-off investment advice from the assets under management K-factor (K-AUM), eliminating the overlap between the latter and client orders handled (K-COH)
  • Staff bonuses are only deductible from fixed overheads if they are dependent on the net profit of the firm
  • Parent undertakings will have to apply capital requirements on a consolidated basis
  • Allowing regulators to exempt Class 3 firms from the liquid assets requirement
  • Widening the definition of liquid assets to include cash at bank, short term deposits and certain liquid financial instruments
  • Extension of large exposure limits to all firms
  • Removing the requirement to disclose the number of high earners
  • Initial capital requirement for OTFs and MTFs reduced to €150k
  • Class 3 firms will not be subject to the revised ICAAP requirements.


Trialogues have started in Brussels under the Romanian Presidency with the Commission due to come forward with a compromise text on the areas of disagreement. The next Trialogues have been scheduled for February with the aim of finalising the Regulation and Directive by the end of the month. If agreement is reached, the new regime could come in effect as early as Q3 2020.


This is hopefully the beginning of the end for the more disproportionate parts of CRD for many investment firms. For non-MiFID investment firms, the FCA may take the opportunity to align its own rules with the new approach.

We recommend that you work out which class you will fall into and model the capital you will need based on the latest European Council proposals. We can help you do all of this.

Please get in touch to find out how we can help you prepare for the changes and challenges ahead.

Updates from February:

Political agreement reached on Investment Firms Regulation and Directive Press release 27.02.19

Updates from January:

Council to start negotiations with European Parliament Press release 07.01.19

Updates from September:

ECON votes to adopt draft reports on the revised prudential framework Press release 24.09.18
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